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Chancellor set to be darling of the Treasury if bank levy goes his way

Alistair Darling now says the proceeds of any new levy on the banks should flow into the Treasury's coffers.

He says that if, as some hope, the proceeds are instead channelled into a grand insurance scheme, the banks might continue to indulge in inappropriate risk-taking, safe in the knowledge that a buffer fund exists if they get into trouble.

Many of the other proposals Mr Darling is exploring — particularly for higher capital requirements — may negate concerns about the moral hazard of an insurance fund.

Is the Chancellor really expecting us to believe that this is his motivation in demanding the rights to the bank levy cash? To all but the most partial of observers, it seems far more likely that Mr Darling wants a useful little windfall for the public finances, as he struggles to pay down the deficit. The debate about a new levy on the banks began with a campaign for a Tobin tax — a levy on transactions that charities still hope could solve the problems of the developing world. Success for that campaign never looked likely. Now the Chancellor is proposing just another tax.

It feels right that the banks should repay taxpayers for the support they have had — and contribute towards the cost of further support. But the Chancellor may struggle to argue this is what he is doing with a bank levy if he simply spends the proceeds, even on something as worthy as deficit reduction.

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